How to CalculateInvestor Math

How to Calculate Net Operating Income (NOI) for Rental Property

Net operating income is the starting point for all income property analysis. Lenders use it for DSCR qualification, investors use it for cap rate valuation, and property managers use it to track performance. Getting NOI right is the foundation of everything else in rental property investing.

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The NOI Formula

NOI = Gross Potential Income − Vacancy Allowance − Operating Expenses

Gross Potential Income

All rent revenue if 100% occupied at market rents. Include base rent, pet fees, parking income, laundry income, and any other recurring property revenue. Do not include security deposits (not income) or reimbursed expenses.

Vacancy and Credit Loss

Standard vacancy allowance is 5% for stable markets, 8–10% for transitional or high-turnover properties. Apply as: Gross Potential Income × Vacancy Rate = Vacancy Allowance. NOI analysis typically uses an economic vacancy rate — even if your property is currently 100% occupied, assume some vacancy in your long-term analysis.

Operating Expenses — What to Include

Property taxes
Insurance (landlord policy, not renter's)
Property management fees (8–12% of collected rent if using a manager)
Repairs and maintenance (typically 1% of property value annually)
Capital expenditure reserve (1–2% of property value annually for major systems)
Utilities paid by landlord
HOA fees
Administrative costs (accounting, legal)

What NOT to Include in NOI

Mortgage payments (debt service) — NOI is pre-financing
Depreciation — non-cash item, not an operating expense
Income taxes — NOI is pre-tax
Capital improvements — these go on the balance sheet, not the P&L

Using NOI to Determine Value

Property value = NOI ÷ Cap Rate. A property with $25,000 NOI in a 6.5% cap rate market has a value of $384,615. This is how commercial brokers price income property — and why NOI accuracy is critical if you're buying based on income.

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Dan White is a licensed Virginia real estate agent at Pearson Smith Realty and founder of FreeDealCalc.com. He has been investing in Northern Virginia real estate for 20+ years.